Consumers get little relief from Fed cuts

CHICAGO (MarketWatch) -- For debt-weary consumers, the Federal Reserve's decision to shave interest rates on Tuesday is welcome news for their stock holdings but won't do much for their mortgage payments or savings accounts.

Responding to fears that a credit crunch -- exacerbated by a sagging job market, a housing-market pullback and the related crisis among subprime mortgage holders -- is squelching economic growth, the Federal Reserve took 0.50 percentage point off the target Fed funds rate, marking the first cut in that benchmark since 2003, and 0.50 percentage point off the discount rate. See full story.

For those on the brink of foreclosure, that's not the life preserver they need to keep them from falling in. And for those who also are subprime mortgage borrowers -- there's an estimated 1.5 million to 2 million out there -- the Fed move is of little consequence.

"It will help those who need it the least," said Richard Hastings, an analyst at Bernard Sands LLC. "But for those who need the most help, this does nothing for them. The Fed cannot help them at all."

Many borrowers who now face painful adjustments in their mortgage rates are stuck because lenders have quit making loans in those riskier markets altogether, making it much harder to refinance out of a burdensome loan regardless of interest rates. The homeowners must either come up with the money for the higher monthly payments, work with their lender to modify their loan terms or sink into default and foreclosure.

The Fed move will, however, lend a hand to those with home-equity lines of credit, whose rates are tied directly to the prime rate, the rate banks charge their most creditworthy customers. Banks generally mirror any Fed rate moves in their prime rate.

"This is going to be the beginning of some relief although it's not going to make a big difference right away," said Ellen Bitton, chief executive of Park Avenue Mortgage in New York.

A half-point cut "will not save the day," said Moody's Economy.com analyst Ryan Sweet. "Further action is going to be needed." He says consumers should watch for next month's Fed meeting on interest rates, set for Oct. 31, as well as the December meeting.

Lower rates could even hurt those whose incomes are tied to short-term interest rates on money markets and savings.

"That's the downside for those households that have financial assets tied to the interest rates and are generating cash off of that," said Carl Steidtmann, chief economist with Deloitte Services.

The decision did, however, catch the markets attention. After the Fed reduced the rates, the Dow Industrials Average rallied more than 260 points to an intraday high of 13,671.02.

Some downs, some ups

Here's what consumers can expect:

If a consumer is paying 8.25% interest on a $100,000 loan that is based on the prime rate -- such as a home-equity line -- a rate reset to 7.75% is likely. That's the difference of about $500 a year, or roughly $41.66 a month in interest charges.

Resets on some adjustable-rate mortgages will be slightly better. Many ARM interest rates are based on an average of Treasury note yields coupled with a fixed margin, now at about 2.75 percentage points. At Tuesday's 10-year yield of 4.49%, the rate is 7.24%. In July, it was at 7.77%. That makes the monthly payment on a $200,000 mortgage $1,363, about $73 less than it was in July. But Treasurys could head even lower following the Fed action.

Rates on credit cards, which have taken on a bigger role in consumer financing in recent months, are likely to dip a bit too, lowering minimum monthly payments.

Savings-deposit rates will go down, meaning that your bank balances won't appreciate at the same rates you've seen all year.

Ditto on money market rates, hurting those on fixed incomes -- generally the elderly -- who rely on cash generated from such safe investments.

Interest rates on new loans for cars will fall, though it won't have any effect on loans already in place. But Brian Bethune, the U.S. economist with Global Insight, urges consumers to wait until contract negotiations between autoworkers and their bosses are done this month. "They could pull out all the stops," he said about automakers' desire to unload inventory. And if the Fed lowers rates again next month, all the better.

Not surprisingly, there's a caveat to all this: The Fed's cut in interest rates comes at a time when prices on energy and commodities are rising. The cut also could stimulate inflation, sending prices on everything higher.

Consider, for example, that each dollar increase in the per-barrel price of crude oil -- now over $81 a barrel -- is equivalent to about 2.5 cents a gallon at the gas pumps.

Even with Tuesday's trimming, there's little question that the Fed has plenty of work ahead of it, said analysts.

"The main thing for consumers is that the Fed wants to make sure there's no disruption in the flow of credit in the system," said Moody's Economy.com's Sweet. That could lead to a recession, which is a retraction in spending.

"If you're already on the bubble, the Fed's action is not going to stop that," he said.

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